'Get building' economists tell Osborne ahead of Autumn Statement that will make the rich pay as deficit plan stalls

Warning: George Osborne should spend £14bn on 'shovel-ready' projects such as repairing roads or maintaining schools and hospitals to stimulate the economy

Economists have told George Osborne to get building to kick-start growth as the Chancellor prepares his Autumn Statement that is expected to confirm deficit targets will be missed and that the rich must pay more.

The highly-respected Ernst & Young Item Club warns that the economy is weaker than feared and has urged the Chancellor to spend £14bn on ‘shovel-ready’ projects such as repairing roads or maintaining schools and hospitals to stimulate the economy.

It also calls for stamp duty for first-time buyers to be temporarily removed or even abolished to revive the housing market.

Ernst & Young expects economic forecasters at the Office for Budget Responsibility to slash the growth outlook on Wednesday.

It believes the OBR will cut its 0.8 per cent prediction for this year to -0.1 per cent, followed by meagre growth of just 1.2 per cent in 2013, down from its March forecast of 2 per cent.

Borrowing this year will also be £8bn more than the £120bn expected by Mr Osborne, according to the report.

Speaking in TV interviews this weekend, the Chancellor warned that tackling the deficit would take longer than predicted, involving further years of spending cuts and tax rises.

Ernst & Young warned that the Chancellor’s credibility will be dented by failure to meet his target of putting the national debt on a downward trajectory as a proportion of national income by 2015-16.

However, a Coalition row is raging over how far to go in squeezing benefit payments and clobbering the pensions of higher-rate taxpayers.

Lib Dem leader Nick Clegg is pushing for a drastic cut in the amount a person can put aside for retirement each year before incurring tax. He is also fighting Mr Osborne’s plans to freeze benefits payments.

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The Chancellor yesterday made no attempt to disguise the scale of the challenge still facing the Government.

He told the BBC’s Andrew Marr Show: ‘I’m very clear going forward, we’ve got to deal with this deficit.

'It is going to take longer. That means more difficult decisions and it’s got to be done fairly.’

The Coalition initially pledged to eradicate the budget deficit within five years. Last year, Mr Osborne said the cuts would extend beyond the election for two years, making a total of seven.

His warning yesterday suggests that timetable is now likely to extend to at least 2018, leaving Britain facing another five years of austerity. But he insisted it would be a ‘complete disaster’ to heed Labour’s call to reopen the spending taps.

Great divide: Ed balls, left, and George Osborne on the Andrew Marr Show yesterday

It is thought he will also attempt to ease pressure on family budgets by postponing a planned 3p-a-litre rise in fuel duty due to come in next month.

Mr Osborne said both the better off and those on benefits will be squeezed further this week, although he has ruled out Lib Dem calls for a ‘mansion tax’ on homes worth more than £2million.

He is expected to slash the amount that high earners can put into their pensions each year before incurring tax from £50,000 to as little as £30,000. The move, which would raise £1.8billion, could affect those earning £100,000 a year or more who are in company schemes. It could also hit individuals who sell a home or business and put the proceeds into their pension pot.

But a row was continuing within Whitehall last night about exactly how far to go on clobbering the pensions of the better off.

Mr Osborne refused to comment on the details of this week’s statement yesterday, but confirmed that the better off would pay ‘more than they’re paying at the moment’.

The Chancellor has also been pressing for a two-year freeze on most benefits, apart from pensions and disability payments, as part of plans to curb the welfare bill.

Mr Osborne said it was unfair to raise benefits by the rate of inflation at a time when the incomes of those in work were being squeezed.

He said: ‘That is the Conservative approach to fairness – make the rich pay but also make sure you’re tackling the welfare system, which is deeply unfair to working people.’

Nick Clegg has pushed for benefit claimants to be handed at least a 1 per cent rise in line with that given to public sector workers.

Shadow Chancellor Ed Balls said he would not back a benefits freeze.

Mr Osborne is also expected to unveil a fresh package of measures designed to boost economic growth, including a drive to exploit Britain’s shale gas reserves and further initiatives to boost house-building and infrastructure projects.

Small businesses will get up to £1billion of loans to boost their exports. Loans from the Treasury will be available for transactions below £50million to give such firms confidence to bid for overseas export contracts.

The scheme will be open for new lending next year up to the end of 2015-16.